Conflicts Aside, Investors Look to Southeast Asia

Southeast Asia has emerged as a darling among investors who have cooled on Brazil, Russia, India and China, but the region presents its own set of challenges, including deep-rooted geopolitical conflicts.

Sabre rattling by China and Vietnam over islands in the South China Sea, political turmoil in Thailand and economies that are perceived to be too closely linked to global leviathans are all opening up investment opportunities for long term investors that have the stomach for such risk, executives told attendees of the Global Private Equity Conference in Washington, D.C.

Private equity investment in the region reached $2.19 billion last year, the highest level since the $3.58 billion invested in 2008, according to the Emerging Markets Private Equity Association.

Risk and volatility in the region are both a boon and a bane for private equity firms, depending on whether the goal is entering or exiting a portfolio company, the panelists said.

Volatility “can considerably extend the time it takes to exit a company,” said Tameem Ebrahim, a founding partner of Indonesia-focused Java Equity Partners.

Executives said general partners in “frontier” markets must be acutely aware of environmental, social and governance issues, possibly even more so than their counterparts in developed markets.

By divesting fossil fuel and firearms investments, limited partners have shown that they are serious about the reputational risk associated with backing certain investments. With the backdrop of tragedies such as the collapse of a Bangladesh garment factory, neglecting safety concerns in an emerging or frontier market would be at a general partner’s peril, in both the eyes of limited partners and the jurisdiction in which it is doing business.

“Local governments in frontier markets are thinking about what they can do to raise income and living standards,” said Alexander Benard, chief operating officer of Schulze Global Investments. “The government needs to understand that you’re not just there to make a quick buck.”

While Southeast Asia has its unique share of risks, it has been somewhat insulated from other factors which might be having a negative impact in other markets.

Executives doing business in the region said the U.S. Federal Reserve’s plan to slow down a multibillion bond buying program known as “quantitative easing” was having relatively little impact on the private equity market, given the industry’s relative lack of reliance on leverage. And China’s economic slowdown isn’t a significant drag to portfolio companies.

“China is a customer and a competitor,” said George Raffini, chairman at Asian firm Headland Capital Partners.

The potential for growth throughout the region remains the biggest draw for investors.

“Indonesia has 45 million people in the middle class, that’s expected to grow to 130 million,” said Mr. Ebrahim. With consumption expected to rise from $500 million to $1.3 trillion among that population, a low penetration of private equity in the region and a lack of financing institutions willing to do anything other than asset-based loans, the environment is ripe for investing, he said.

The prevalence of control investments throughout Southeast Asia has given rise to distributions in the region, setting it apart from places such as India and China where minority stakes and growth plays are the norm, said Quilvest Partners’ Maninder Saluja.

Those distributions likely propelled a capital raising boost in the region, which in 2013 reached a five-year fundraising peak of $2.89 billion, according to EMPEA’s data.